What is a CD?
A certificate of deposit (CD) is a certificate issued by a bank as evidence of a time deposit with the bank’s promise to return the deposit plus earnings. The CD bears a specific maturity date, a specified interest rate, and can be issued in any denomination. Time deposits may not be withdrawn on demand like a checking account. A substantial penalty is levied on any premature withdrawals. The amount of the earnings of a CD depends largely on the amount of the deposit, the length of time the deposit is made for and the current interest rate.
An important issue to understand when dealing with certificates of deposit is the difference between annual percentage rate (APR) and annual percentage yield. The APR is simply the stated interest a CD earns in one year without taking compounding into account. The APY is the total amount of interest a CD earns in one year including compounding interest. In other words, the interest a CD earns is compounded, begins earning interest itself and thus, results in an APY which is slightly higher than the APR.
Certificates of deposit are popular investment vehicles which can provide a good return on your money without any of the risks inherent in more volatile investment options such as the stock market. Stop by and let us help you decide which CD is best for you.
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